New LSTA Par/Near Par Delayed Compensation Regime

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After a brief postponement, the Loan Syndication and Trading Association (LSTA) published revised Standard Terms and Conditions, effective September 1, 2016, for its Par/Near Par Trade Confirmation (Revised Standard Terms) to implement a new regime for par/near par delayed compensation. The changes represent the most significant revision of LSTA loan pricing in the almost 20 years since the LSTA was formed. Going forward, a buyer under an LSTA par/near par loan trade is not always entitled to "delayed compensation."

Delayed compensation refers to the buyer's entitlement, starting on the seventh business day after the trade date (i.e., T+7), to interest and accruing fees on the loan, minus an amount intended to compensate the seller for its cost of funds during the delay period.1 Until now, buyers have been entitled to delayed compensation as a matter of right on a no-fault basis. Under the new requirements model, the buyer is only entitled to delayed compensation if it fulfills a number of requirements or if the seller fails to satisfy certain of its requirements. These requirements pertain to the timing by which the LSTA Par/Near Par Trade Confirmation (Confirmation) and the assignment agreement in the form provided with the relevant credit agreement (Assignment Agreement) are executed and circulated. They also dictate when a buyer must be ready to close and when they are required to fund upon the settlement of the trade. The new rules are scheduled to be implemented in two stages, phase one and phase two. Some key provisions will be applicable for transactions entered into from September 1, 2016 to October 31, 2016 (Phase I). The rest of the provisions will go into effect for transactions entered into on or after November 1, 2016 (Phase II).

This note and the attached charts highlight some of the key changes to the LSTA delayed compensation pricing regime. Note that changes are not being implemented for LSTA distressed trades. Nor are they yet being proposed by the Loan Market Association (LMA), under which most European loans trade.

The Revised Standard Terms include two separate sets of requirements to determine entitlement to delayed compensation. The vast majority of LSTA par/near par transactions will follow the "Settlement Platform Requirements," which are applicable to transactions that settle on electronic settlement platforms, such as ClearPar or...